How to Report Worthless Stock on a Tax Return: Form 8949, Section 1244

To report worthless stock on a tax return, you treat the security as if you sold it for $0 on December 31 of the year it became worthless, and you enter that deemed sale on Form 8949 and Schedule D. If the stock qualifies as Section 1244 small business stock, the ordinary loss portion goes on Form 4797 instead. The filing itself is not complicated. Getting the year right, and proving the stock is actually worthless, is where people run into trouble.

Reporting the Loss on Form 8949 and Schedule D

Worthless securities are capital assets by default, so the loss is a capital loss reported on Form 8949 (Sales and Other Dispositions of Capital Assets).¹ Use Part I if the loss is short-term, Part II if it’s long-term.

Fill in the entry like this:

Description: the name of the security.
Date acquired: your actual purchase date.
Date sold: 12/31 of the year the stock became worthless. The tax code deems the sale to occur on the last day of that year regardless of when the company actually failed.
Sales price (proceeds): $0.
Cost or other basis: what you paid, plus any commissions.

The totals flow from Form 8949 to Schedule D (Capital Gains and Losses), which nets your gains and losses for the year and carries the final figure to Form 1040.² Capital losses first offset capital gains dollar for dollar. Any net loss beyond that offsets ordinary income up to $3,000 per year ($1,500 if married filing separately), and anything still unused carries forward indefinitely, keeping its short-term or long-term character.³

Why the December 31 Sale Date Matters

The deemed-sale-on-December-31 rule is not just a filing convention. It sets your holding period, which determines whether the loss is short-term or long-term.⁴ You measure from the purchase date to December 31 of the loss year. One year or less is short-term; more than one year is long-term.

This usually helps you. Stock bought in February and driven to zero in November of the same year would ordinarily produce a short-term loss, but the December 31 rule can stretch the holding period past the one-year mark, converting it to long-term. Whether that helps or hurts depends on what other gains and losses you have that year, since short-term losses first offset short-term gains (taxed at ordinary rates) and long-term losses first offset long-term gains (taxed at capital gains rates).

Is the Stock Actually Worthless?

Before you file anything, the stock has to be completely worthless. Not down 99%. Not delisted while still trading in fractions of a penny. Zero, with no reasonable possibility of future value. A share trading at any price still has market value and does not qualify.

The burden of proof is on you. The strongest evidence is an identifiable event: a Chapter 7 liquidation in which shareholders received nothing, a formal dissolution, or a court finding of insolvency with no remaining assets. A company that quietly stopped operating may still qualify, but the case is harder without formal proceedings. The test is whether any reasonable possibility remains of receiving something of value.

The loss belongs to the year the security actually became worthless, not the year you found out about it. If a company liquidated in 2024 and distributed nothing, the deduction goes on the 2024 return even if you didn’t learn about it until later. Filing it in the wrong year is one of the fastest ways to lose the deduction entirely.

Section 1244 Stock: Ordinary Loss on Form 4797

If your stock qualifies under Section 1244, the loss can be ordinary rather than capital, which means it offsets wages and other income without the $3,000 annual cap.⁵ All of these must be true:

The issuer was a U.S. corporation that had received no more than $1 million total in money and property for all of its stock at the time your shares were issued.
During the five tax years before the loss, more than 50% of the corporation’s gross receipts came from active business operations, not passive sources like rent, royalties, dividends, interest, or investment gains.
You received the stock directly from the corporation in exchange for money or property. Stock bought on the secondary market, received as a gift, inherited, or issued in exchange for services does not qualify.
You are an individual, or a partnership passing the loss through to individual partners.

Report the qualifying ordinary loss on Form 4797 (Sales of Business Property), Part II, Line 10. In the description column, write “Losses on Section 1244 (Small Business Stock)” and enter the allowable loss.⁶ Attach a computation showing how you arrived at the amount, as the Form 4797 instructions direct.

The ordinary loss is capped at $50,000 per year for single filers and $100,000 for joint filers. Anything above that cap reverts to capital loss treatment and gets reported on Form 8949 and Schedule D under the regular rules.⁶ Keep documentation for every Section 1244 requirement. Without it, the IRS can reclassify the whole loss as capital.

If You Missed the Right Year

Pinpointing the exact year a security died is genuinely hard, and Congress built in extra time for this specific problem. You have seven years from the original filing deadline of the return in question, not from when you filed, to amend a return and claim a worthless security deduction.⁷ Most amended returns get only three years.

To claim it, file Form 1040-X for the year the stock actually became worthless.¹ If a stock became worthless in 2020 and you only discovered it in 2025, the 2020 return was due April 15, 2021, so you have until April 15, 2028 to amend it.

Selling for a Nominal Amount Instead

If proving worthlessness feels shaky, or you can’t nail down the year, selling the shares to an unrelated third party for a token amount solves both problems. A $1 or $10 sale creates a real transaction with a clear date, an actual buyer, and a reportable line on your brokerage statement. You report it as an ordinary sale on Form 8949: the loss is your basis minus the nominal proceeds, and no worthlessness argument is needed.

The trade-off is finding a buyer. For stock in a defunct private company, that can be difficult. For delisted public stock that still gets quoted at a fraction of a penny, the sale route is usually cleaner than fighting to establish worthlessness.

1
Internal Revenue Service. Publication 550 – Investment Income and Expenses
2
Internal Revenue Service. About Form 8949, Sales and Other Dispositions of Capital Assets
3
Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
4
Office of the Law Revision Counsel. 26 USC 165 Losses
5
Office of the Law Revision Counsel. 26 USC 1244 Losses on Small Business Stock
6
Internal Revenue Service. Instructions for Form 4797
7
Office of the Law Revision Counsel. 26 U.S. Code 6511 – Limitations on Credit or Refund